Transcription of lambda (options leverage) - Eric Benhamou
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lambda (options leverage) - Eric Benhamou
lambda ( options leverage ) INTRODUCTION The lambda (option leverage ) is defined as the percentage change in an option price divided by the percentage change in an underlying price. Also called effective gearing or also leverage factor, the lambda is a measurement of the option's and defined mathematically by the following ratio: SCSCCSSSCC lnln// = = = ( ) Although some authors called also lambda what is commonly called as the vega and defined as the derivatives sensitivity with respect to the volatility, the usage of lambda to mean option leverage have become predominant in option pricing literature. From the mathematical definition ( ), one can see that the lambda is: a by-product of the delta since it is simply the product of the delta time the ratio of the underlying price over the option price1 equal to the logarithmic delta or in other words equal to the logarithmic derivative of the option price with respect to the underlying price Because of its straightforward relationship with the delta and its non-direct relationship with hedging, the lambda is not a very
lambda (options leverage) INTRODUCTION The lambda (option leverage) is defined as the percentage change in an option price divided by …
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